The popularity of Buy Now, Pay Later (BNPL) services like Klarna and Afterpay has surged in the past year, according to Harvard Business Review. These platforms, which allow consumers to split purchases into manageable installments, are being increasingly used for everyday expenses like groceries and online shopping. While their convenience appeals to college students on tight budgets, experts have serious concerns about their popularity.
For consumers, part of the appeal comes from low-to-zero interest rates. “If their services are not charging you anything [to use them], there’s no added charges at all,” said David Zirkle, CBE Director of Student Success and Economics Faculty, in an interview with The Rotunda. This structure allows consumers to pay the same total amount for an item, just spread over time.
For this reason, BNPL platforms provide an attractive alternative to traditional credit cards for those on tight budgets. While traditional credit cards charge interest rates, most BNPL platforms do not. “At this point, [credit cards] are going to have interest rates in the 20% range,” Zirkle said
“Part of why they’re willing to [offer low interest rates] is, instead of charging your credit card four times, they’re pulling the money out of your bank account four times,” Zirkle said. “That gives them more confidence that they’re going to get their money.”
While there are potential conveniences to using BNPL sites, Zirkle also cautioned the risks. “If you forget you’ve got one more payment left and you let your balance get low, then your bank will charge you some really hefty fees if you find yourself without any money in your bank account,” he said.
Zirkle said students should be cautious when using BNPL programs, especially on tight budgets. “You’re suddenly putting everything on there,” Zirkle said. “You could get to a point where your paycheck comes in and it’s all just absorbed by the things that you bought last month.”
The important thing to consider when using BNPL services is ensuring that you have enough money to cover payments in advance. This is something to keep in mind when deciding whether BNPL is a financially sound option.
Asked if he would recommend BNPL programs to students, Zirkle said, “I think it’s harder to budget. If, say, you are a student and your computer dies, and the alternative to replacing that computer is putting it on a credit card and not being sure when you’re going to pay it off and spreading those payments out four ways, then it’s better to spread it out [those] four ways than to pay for that higher interest rate.”
Zirkle says the real problem when it comes to using these sites is that “It’s harder to budget.” When looking at your financial situation, you have to take into account “what the alternative is,” as Zirkle said.
“If, say, you’re a student and your computer dies, and the alternative to replacing that computer is putting it on a credit card and not being sure when you’re going to pay it off and spreading those payments out four ways,” Zirkle said. “Then, it’s probably better to spread it out four ways than to give that higher interest rate [on the credit card].”
“It feels like it can be a saving grace in certain circumstances, but in others, it can be dangerously convenient,” he said.
